A year after launching its sometimes-controversial alliance with Kazaa, Brilliant Digital Entertainment subsidiary Altnet is kicking off a new, ambitious stage of its peer-to-peer marketing campaign.

Later this week, Kazaa parent Sharman Networks and Altnet will jointly release a new bundle of file-swapping software that will include components of a new high-security peer-to-peer network and a program that will pay users to be a part of it.

The idea, says Altnet CEO Kevin Bermeister, is to harness the computing resources of the tens of millions of Kazaa users to distribute authorized files such as games, songs and movies. Giving people an incentive to host and trade paid files could create a powerful medium for distributing authorized content and could diminish file-trading networks' role as hubs of online piracy, he said.

"The minute you begin shifting unauthorized files out of people's shared folders, the peer-to-peer networks (as sources of copyright infringement) begin to disappear," Bermeister said. "Lawsuits are the stick approach. This is the carrot."

The release of the new service is a landmark moment for both Altnet and Kazaa, which is far and away the most popular file-swapping software program online.
Bermeister's plans for marketing authorized files using Kazaa have been an instrumental part in the strategy of Sharman since its inception in early 2002.

It also could serve as a first large-scale test of the idea that the current generation of file-swapping networks can be hosts for legitimate business as easily as for copyright infringement. This has long been a contention of peer-to-peer advocates, but the idea has been tested only in limited and small-scale ways to date.

Altnet's relationship with Kazaa emerged a year ago, when Altnet parent Brilliant Digital Entertainment released word in a federal financial filing that it planned to weld the millions of Kazaa users into a new marketing network.

Because the companies didn't communicate their plans with Kazaa users, the news sparked fears of "spyware" infestations and computer hijackings. But Altnet's initial manifestations turned out to look more like the paid search listings found on many portals such as Overture. Companies who paid Altnet could buy search terms inside Kazaa and have links to their products be returned along with ordinary search results.

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The new service delivers on many of Altnet's original promises. Consumers who sign up for the service will agree to install software that will create a high-security file-swapping network alongside the ordinary Kazaa service. They can then host files that are authorized for distribution through this network and will receive "Peer Points" that can be redeemed for prizes every time someone uploads a file.

The hosted files that are authorized by content companies will show up in ordinary Kazaa searches. A company distributing a pop song, for example, might buy the keyword "Britney Spears" and links to its content will show up for people searching for the singer's work.

The most visible manifestation of this for Kazaa users will be a small Peer Points application that will keep track of Altnet users' ongoing point total and let them control features such as how many people can connect to a host computer at once and how much bandwidth a user wants to dedicate to the service.

The rewards will range from free access to paid content to sweepstakes entries toward cars and big-ticket cash prizes. The value of the prizes will depend on how many customers Altnet can attract and how much the company can persuade them to offer.

Sharman executives say the new system is well worth bundling inside their software, but they say it can be easily removed if users don't wish to participate.

"Altnet's Peer Points is like the spell checker in Microsoft's Word," said Phil Morle, director of technology for Sharman Networks. "It's an integral part of the program that you can choose to use or not."

A new version of the Kazaa file-swapping software also is expected to launch this week, including better antivirus tools, Web browsing features and content "channels" and the ability to find up to 1,000 results per search.

Overcoming history
Since Altnet began to offer links to content companies' authorized files it has been responsible for more than 20 million downloads per
month, Bermeister said. The service uses several digital rights management tools and has become the largest purveyor of Microsoft Windows Media files, he added.

Past and current customers have included Atari
(formerly Infogrames), Sanctuary Records, artist Ice
T, and even Microsoft has paid to have Windows Media promotional files distributed over the network.

But Bermeister's close association with Sharman Networks and Kazaa, which remains the target of lawsuits from big record companies and Hollywood studios, may make it difficult for him to find customers in the largest content companies.

Bermeister was instrumental in creating the modern version of Kazaa, introducing Sharman Networks CEO Nicola Hemming to the original creators of Kazaa in the
Netherlands. Hemming's original plan for the file-swapping service was long intertwined with Bermeister's vision of using it to distribute
authorized conent, although Bermeister denies being one of Sharman's as-yet-undisclosed investors.

The Altnet CEO has spent a year talking to executives at the large content companies and claims to have won some friendly ears among new media executives. However, concerns about litigation and Kazaa's
ultimate legality blocked any deals.

Bermeister and Altnet played a key role in Sharman Networks' January countersuit against the record companies and movie studios, which accused them of antitrust law violations based in part on their refusal to deal with Altnet. Several content company executives privately said they felt betrayed by Bermeister's role in that filing.

The legal landscape has changed somewhat since then, however. In April, a Los Angeles federal judge ruled that decentralized file-swapping network software was legal to distribute and that the parent companies of Grokster and Morpheus--services similar to Kazaa--were not liable for the copyright infringement of their software's users.

Sharman was not directly affected by that ruling, but its own litigation with Hollywood studios and record companies is likely to follow a similar course. The content companies have said they will appeal the ruling, however.

Even as Altnet launches its ambitious new service, parent Brilliant Digital is struggling on the edge of financial survival. In a federal securities document filed in late May, the company said it had "negative working capital of approximately $4,165" and that there were substantial doubts about its survival. However, the filing said Brilliant Digital expects another round of financing to boost operations soon.

The company is looking to a new patent license for one new revenue source. It has acquired rights to a 1999 patent that Bermeister says covers the technique of identifying files on peer-to-peer networks using a "hash," or digital fingerprint based on the contents
of the file. The company will approach virtually all other peer-to-peer services to seek license rights, Bermeister said.

The company also serves as a U.S. business development agent for Sharman Networks and Kazaa and earned $20,000 in commissions last quarter, according to federal securities documents.

The new Altnet service and Kazaa software are expected to be released in test form later this week.

Discuss: Altnet to pay Kazaa users for swapping

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